How Long Can China's Debt Continue To Grow Before A Systemic Crisis Strikes?

Nearly three years ago, Morgan Stanley may have jumped the shark (a little) when its strategists Cyril Moulle-Berteaux and Sergei Parmenov declared that China's Minsky Moment has arrived. While that may have been partially true, the fact that China managed to incur an additional $12 trillion in total debt in the interim period, suggests that Beijing at least managed to postpone the inevitable.

And since in the 3 years since little has changed, questions about how much longer the Chinese debt-fueled growth "farce" can continue have once again emerged, in their latest incarnation courtesy of UBS, whose economist Tao Wang asks "How long can debt continue to grow before a Minsky moment or systemic debt crisis?"

China's debt is set to rise further in the coming years, likely exceeding 300% of GDP within 2 years. As the government continues to rely on credit-fuelled investment growth to offset downward pressures within the domestic economy and from a subdued global environment, unless there is major debt restructuring, China's debt/GDP ratio is set to rise further. We don't think that there is a "magic"  level at which a debt crisis will take place. Many countries ran into debt crises at levels of debt significantly lower than China's current level, often because debt was financed by foreign resources due to low domestic savings, and/or because of duration mismatch (Figure 11).

Conversely, there are countries (e.g. Japan, Figure 2) where debt levels have risen ever higher without triggering any obvious financial sector distress.

Four factors make a typical systemic debt crisis unlikely for China. Typical debt crises are often liquidity crises of the financial system. In China,

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